Educational Scholarship Exemption section 10(16) Income tax Act, 1961

Scholarship granted to satisfy the cost of education is exempt from tax. Scholarships also are broadly categorized into means-based scholarships which are disbursed to students after considering their financial need. Yes, there are some scholarships in India that are specifically meant for higher education students coming from economically backward classes. The major factor that determines whether a student is eligible for such scholarships is that the annual family income of the family.

SCHOLARSHIP OR STIPEND RECEIVED BY A STUDENT FOR PURSUING HIGHER STUDIES EXEMPTED INCOME FROM INCOME TAX UNDER SECTION 10(16)

Scholarship granted to meet the cost of education is exempt from tax, as it does not form part of total income of the assessee. Section 10(16) of the income tax act, scholarship granted to meet the cost of education are exempt from tax. The cost of education also includes incidental expenses incurred for education and the exemption is irrespective of actual expenditure. In order to avail the exemption is not necessary that scholarship should be financed by the Government.

The term "cost of education" takes within its ambit not only tuition fee, college fee, hostel fee but all other incidental expenses incurred for acquiring education.

Once it is provided that the amount received is "scholarship" it will be fully exempt from tax irrespective of its terms of award. The position remain so even if the scholarship is received for pursuing a course of education not leading to a degree.

The exemption in the hands of recipient depends on what it is meant for the person paying or disbursing the scholarships. If it's paid only for meeting the cost of education, it's exempt from tax although the recipient doesn't spend the entire amount towards education or that he is able to save something out of it. To put it differently, if the whole object of the payment is to meet cost of education, then no further inquiry is called for in order to exclude the amount from taxable income under section 10(16).